WEALTH HEALTH: Don’t ‘invest’ in accounts now paying 2 percent

Friday

Aug 3, 2018 at 11:38 AM

Interest rates have been so low for so long that some would-be savers are now excited that the best savings accounts are paying 2 percent.

Worse yet, a generation of savers that grew up disenchanted with the stock market apparently believes that the paltry yields available on cash deposits today are going to help them reach the promised land of a secure retirement.

Yes, rate hikes are good for consumers, but there is a big difference between “consumers benefit” and “This will carry you to your financial goals.”

Higher rates are not a panacea for savers, no matter how much some people want to think that happy days for savings instruments are here again.

The latest Financial Security Index from Bankrate.com shows that nearly one-third of millennials (people aged 18 to 37) believe that cash is the best place to park money they won’t need for a decade or more. Less than one-quarter of the millennial generation believes that the stock market is the best place for long-term money growth.

If millennials favor cash, you’d think they would be good at socking the dollars away, but the same Bankrate study showed that millennials had the lowest propensity of any generation to earn above 1.5 percent on their savings, and were the most likely to be holding accounts that pay nothing, or to have savings where they simply didn’t know the rate being paid.

All this at a time when savers are being thrown a bone by a string of rate hikes that have finally – if only just barely -- lifted savings rates off the floor.

And while it’s easy to single out the millennials, the truth is that nearly one-in-four Americans, regardless of age, thinks cash is still king.

What makes this hard to believe is that the stock market has been on a bull run that has lasted nearly a decade now, while rates paid on savings accounts, certificates of deposit and money-market funds have been near zero for the vast majority of that time.

“There’s no question that some savers – especially those who have never really seen savings accounts with interest rates above 2 percent – are getting excited now that we are seeing 2 percent out there,” said Jason Reposa, chief executive officer at MyBankTracker.com. “They might be excited by the rate, but if they don’t know the terms, and they sign up for an account with, say, a monthly maintenance fee, they’re not actually earning 2 percent, they’re actually getting something like a negative 12 percent.”

Indeed, as rates have slowly crept up, financial institutions first re-instituted fees and other charges – and eliminated past waivers that kept accounts from having negative interest rates – before they actually increased payouts.

Meanwhile, the millennials who first came of age to invest as the financial crisis was blasting the market before the bull run are still recovering from seeing their first efforts to save cut in half right out of the box – has scarred them.

A recent millennial study by Bank of the West noted that while the generation is confident that it can use investment products well, they instead prefer to keep their savings out of the market, having been made forever more conservative due to the financial crisis.

Greg McBride, chief analyst at Bankrate.com, noted that part of the problem that all savers face now – but especially the millennial generation – boils down to appearances.

“Anyone who has been around a long time know that 2 percent is not a great rate, but when you have been at 1 percent or less for so long, you can’t help but see the number and think that 2 percent as twice as good as one percent,” McBride said.

“But even that is not necessarily true because inflation is moving up too,” he added. “For the last decade, you were trailing inflation in the best of savings accounts; today, you may be able to keep pace with it, but that’s not a win for someone looking to grow their long-term savings. That’s just treading water.”

Improving bank yields, CD rates and money-market accounts are good news for anyone parking cash for the short-run or keeping powder dry for the foreseeable future.

But the Bankrate study showed that when you lump all Americans together, cash was the second most popular pick as a long-term investment, trailing the stock market but ahead of real estate, gold and precious metals, bonds and even Bitcoin and other cryptocurrencies.

Even if they feel strongly about cash, however, just 18 percent of U.S. adults are earning more than 1.5 percent on their savings, a rate that is far short of the top savings and money-market accounts now.

Savers who see cash as a long-term investment need to understand just how far behind they are falling.

At 2 percent, it takes 36 years for a saver to double their money; by comparison, at 5 percent, their savings would double every nine years. On a $10,000 investment for that time frame, that’s the difference between hitting $20,000 and reaching $60,000.

If the stock market was simply to return its historical norm of roughly 10 percent, that $10,000 investment would grow to $320,000.

The difference is why savers can’t be fooled into thinking that 2 percent is a “good rate” at which to grow savings.

Putting some money to work at improved rates is a fine idea, but keep the long-term money that needs to show growth in a well-diversified portfolio, and let the power of compounding work in your favor.

“It’s okay to be scared, especially when the bull market has gone on so long and you are worried that it is overdue for a correction,” McBride said, “but it’s not okay to give in to those fears. Cash is not an appropriate long-term investment. It wasn’t at 1 percent, it’s not at 2 percent and it’s not going to be under current interest rate conditions, even if the Federal Reserve keeps raising rates for a while.”

Chuck Jaffe of Cohasset is senior columnist for MarketWatch. Read more of his columns. Reach him at cjaffe@marketwatch.com.

Never miss a story

Choose the plan that's right for you.
Digital access or digital and print delivery.